UK service sector optimism grows to highest level since 2006

Firms planning to expand despite being hit by Brexit port delays and falling orders due to Covid

Optimism across the services sector improved for the fourth consecutive month in February to its highest level since 2006, reflecting hopes that the Covid-19 vaccine rollout will lead to a strong economic rebound.

The IHS Markit survey found that business leaders were planning to expand their activities over the next 12 months despite several months of falling orders during the UK’s third lockdown and port delays after the Brexit trade deal was reached with the EU in December.

International travel restrictions were the most commonly cited reason for lower exports along with increased paperwork at UK ports since January, which also stifled business activity by limiting essential imports, businesses said.

Most firms looked beyond their current difficulties to focus on the prospect of looser restrictions on trade resulting from a successful vaccine rollout programme.

The IHS Markit/CIPS purchasing managers index (PMI) covering the service sector stabilised at 49.5 in February, up sharply from an eight-month low of 39.5 in January. A figure of 50 separates contraction from expansion.

Tim Moore, the economics director at IHS Markit, said: “While customer-facing businesses continued to report severe constraints on activity due to the pandemic, there were signs of growth in technology and some business services after a disappointing start to 2021.

“Survey respondents cited regulatory issues and supply disruption as factors holding back new business wins from EU customers which more than offset the positive impact on overseas demand from the economic recovery in the US and Asia-Pacific.”

There was a warning from survey respondents about rising prices, which they said were passed on during February partly in response to Covid-related shortages of shipping on the main international routes and Brexit-related delays.

Howard Archer, the chief economic adviser to the EY Item Club, said the outlook remained uncertain despite several forecasts that showed consumers who had accumulated high levels of savings were poised to spend them in the second half of the year.

“Consumers are well-placed to play a key role given the recent high savings ratios, although much will depend on how much unemployment ultimately rises. After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy.”

Increased optimism also helped to stabilise employment, with only a small fall across services firms, which represent around three-quarters of the UK’s economic activity.

Source: The Guardian